AAPL - Apple Inc.

[Palantir]

When I went to the Berk AGM...my rental had a Beats sound system.....I see it more and more these days.

[txlaw]

IMO, this acquisition -- which I think is definitely because of the Beats Music streaming service -- underscores how the OS is commoditizing and software and services that run on top are becoming the primary place for value.

 

As the difference between iPhones and Android (and other) devices becomes smaller and smaller, Apple has to differentiate itself with its software and services.  iTunes Radio, iCloud, iLife, etc. is necessary for Apple to make the case for its products having such a premium over other manufacturers. 

 

What's really interesting to me is that Beats Music is actually a cross platform service (which has at least one subsidy deal with a major carrier, AT&T).  If iTunes and Beats Music merge, that potentially means that iTunes will be cross platform.  OR perhaps iTunes will be the Apple-only version of Beats Music, which will be the cross platform brand.  Another thing to consider is that this purchase will almost certainly increase the cannibalization of iTunes music sales.  It's been a while since I've bought any music -- I just use Spotify Premium, but I will buy if I see the artist perform -- and the shift to subscription music service appears to be the general trend.

 

This is absolutely a defensive acquisition -- similar to Skype or WhatsApp.  As always, it's very hard to figure out the ROI on defensive acquisitions versus clearly accretive M&A.

[rkbabang]

Like said in the other thread, you see people walking around all the time with Beats plugged into an apple product.  This is was a hole in Apple's product line and a company that had already out-Appled Apple with the marketing, cosmetic design, and coolness factor.  Apple couldn't put out a competing product, because they would have to compete against Beats and would probably lose.  Besides the margins on these things have to be incredible.  My daughter has a set of Beats Studio and I've compared them to my Sony headphones which cost me about $75.  They sound about as good as each other, the Beats have more lowend, which you can correct for at the source.  The point is that if Sony can make money charging $75, what are the margins on Beats at over $300?  I'm not sure what they spend on marketing, but you can manufacture these things for a small fraction of what they are selling them for. $3B doesn't sound like too much to pay if Beats has between $500M and $1B in sales with 40-90+% margins.  Then there is the streaming service, Apple is getting the profitable headphones business and taking out a small competitor.  Sounds like a good deal to me.

[Liberty]

IMO, this acquisition -- which I think is definitely because of the Beats Music streaming service -- underscores how the OS is commoditizing and software and services that run on top are becoming the primary place for value.

 

How can you conclude that from this? It's not like Apple has stopped investing in iOS and is now just focused on services. This is just a small acquisition for them to make their ecosystem a bit better. 0.6% of market cap for a fast-growing high-margin business.  Even if it turns out to be a bad acquisition, it won't change much.

 

If OSes are commoditizing, how is it that Apple is making the vast majority of all the profits in the industry? Just because its hardware is better designed? Because Apple's services are so much better? Or maybe the OS is a major differentiator of the user experience too and those other things aren't enough (a lot of good focusing on hardware did to HTC and Nokia)... Don't look at the OS from a programmer's point of view ("oh, who cares what kernel architecture"), look at it as the thing that customers look at and interact with all day long. It has huge value. This is a consumer product, not a piece of machinery that you stick in the corner of a factory so all you care about is that it does the job at the lowest cost... People who don't get Apple mostly go wrong because they have the wrong mental models. They look at how enterprise products commoditize and expect consumer products to act exactly the same way despite the fact that they use different yardsticks.

 

Android is a commodity. Anyone can use it, it gives no advantage to anyone over anyone else to use it. In fact, Android vendors are making big efforts to differentiate themselves by changing the UI and software (Tizen, proprietary apps that duplicate existing android apps, which is why Samsung has 2 settings apps and 2 photos apps, etc), it's just too bad these vendors mostly suck at software and that there's only so much you can do on top of a platform you don't control. But iOS is differentiated; only Apple can use it and shape it, and they also happen to shape 100% of the hardware it runs on, so they can integrate it much better, and people clearly like the result better for a variety of reasons.

 

As the difference between iPhones and Android (and other) devices becomes smaller and smaller

 

That must be why the Galaxy S5 got lukewarm reviews and Samsung just fired the guy in charge of its design. Because they're now on the level of quality of the iPhone.

[ni-co]

What's really interesting to me is that Beats Music is actually a cross platform service (which has at least one subsidy deal with a major carrier, AT&T).  If iTunes and Beats Music merge, that potentially means that iTunes will be cross platform.  OR perhaps iTunes will be the Apple-only version of Beats Music, which will be the cross platform brand.  Another thing to consider is that this purchase will almost certainly increase the cannibalization of iTunes music sales.  It's been a while since I've bought any music -- I just use Spotify Premium, but I will buy if I see the artist perform -- and the shift to subscription music service appears to be the general trend.

 

Good question. A cross platform iTunes wouldn't be without precedent: It exists on Windows – one thing they really had to convince Steve Jobs of at the time. iTunes wouldn't have gotten where it is today, if it had stayed Mac only; most probably iPods wouldn't have succeeded at all. However, it was all about access to the mass market. Today, Apple has this access and, with regard to differentiation, it doesn't make any sense to go cross platform again.

 

With regard to cannibalization of iTunes music sales: It's already happening and it has always been Apple's philosophy to better cannibalize your own products than being cannibalized by others; they simply try to look where the puck is going to be.

[Liberty]

I wouldn't be surprised if Apple killed the Android and Windows Phone versions of the Beats app over time.

 

They gain almost nothing by keeping them (a few dollars, not material to them). They would gain more by making it iOS-only; people who like Beats can only get it on iPhone/iPad, people who get an iOS device get access to a service that nobody else has. Further differentiation and lock-in, one more reason to buy the hardware and stick around. It'll integrate nicely into CarPlay too, I bet. More money to be made that way.

 

They'll probably keep the web interface, but that won't help people with Android mobile devices much.

 

iTunes exists on Windows because the computer serves as a synch station/management interface for the device. But iTunes doesn't exist on Android/Windows mobile devices. Beats might be multi-platform in the same way (if you have an account, you can listen/manage your stations/playlists on your computer at work, but you can't listen through the app on non-iOS mobile devices).

[ni-co]

I wouldn't be surprised if Apple killed the Android and Windows Phone versions of the Beats app over time.

 

They gain almost nothing by keeping them (a few dollars, not material to them). They would gain more by making it iOS-only; people who like Beats can only get it on iPhone/iPad, people who get an iOS device get access to a service that nobody else has. Further differentiation and lock-in, one more reason to buy the hardware and stick around. It'll integrate nicely into CarPlay too, I bet. More money to be made that way.

 

They'll probably keep the web interface, but that won't help much people with Android mobile devices.

 

iTunes exists on Windows because the computer serves as a synch station/management interface for the device. But iTunes doesn't exist on Android/Windows mobile devices. Beats might be multi-platform in the same way (if you have an account, you can listen/manage your stations/playlists on your computer at work, but you can't listen through the app on non-iOS mobile devices).

 

I'm not so sure about killing the other apps. There is a "strategy tax" involved with it: You can't become the world's leading streaming music service without being available cross platform. This would make Beats far less attractive to record labels and artists, especially compared to rivals like Spotify and Rdio.

 

John Gruber linked to this blog post making a case for keeping the apps separate.

http://jonmaples.com/2014/05/08/the-magic-numbers-how-apple-beats-the-demise-of-music-downloads/

[txlaw]

IMO, this acquisition -- which I think is definitely because of the Beats Music streaming service -- underscores how the OS is commoditizing and software and services that run on top are becoming the primary place for value.

 

How can you conclude that from this? It's not like Apple has stopped investing in iOS and is now just focused on services. This is just a small acquisition for them to make their ecosystem a bit better. 0.6% of market cap for a fast-growing high-margin business.  Even if it turns out to be a bad acquisition, it won't change much.

 

My conclusion is not derived from this particular acquisition.  I have argued that the OS is commoditizing for a while now.

 

What this particular acquisition does is underscore the notion that both phone hardware and the OS itself are commoditizing.  $3 billion may be chump change to Apple, but it's difficult to argue that this is not a lot of money to pay for Beats.  I don't think they would be paying that much simply for Beats technology and the brand -- I doubt it would be accretive just on that basis.  Moreover, I agree with board members who say that the Beats brand itself adds very little value to Apple.  Apple has one of the best brands on the planet.  If Apple released their own hardware and marketed it as being the best audio hardware available, they could easily take a huge share of the market from Beats and make great profits on it.

 

Instead, I think this is about their music service and how important it is to keeping Apple relevant versus much lower cost solutions.

 

If OSes are commoditizing, how is it that Apple is making the vast majority of all the profits in the industry? Just because its hardware is better designed? Because Apple's services are so much better? Or maybe the OS is a major differentiator of the user experience too and those other things aren't enough (a lot of good focusing on hardware did to HTC and Nokia)... Don't look at the OS from a programmer's point of view ("oh, who cares what kernel architecture"), look at it as the thing that customers look at and interact with all day long. It has huge value. This is a consumer product, not a piece of machinery that you stick in the corner of a factory so all you care about is that it does the job at the lowest cost... People who don't get Apple mostly go wrong because they have the wrong mental models. They look at how enterprise products commoditize and expect consumer products to act exactly the same way despite the fact that they use different yardsticks.

 

The problem is that you're looking in the rear view mirror. 

 

The innovation gap is definitely closing. I’m talking about this purely from a customer’s perspective.  Have you used the Nexus 5 or a Nexus 7?  They're both pretty awesome.  Android has made amazing strides and is very, very close to iOS in terms of UX.  In fact, Android and its derivatives blow iOS out of the water in some respects, particularly with respect to integrated services.

 

I think it’s a bit of a denial to say that people who don’t “get Apple” have the wrong mental models and those mental models simply don’t apply to consumer products.  I’ve talked before about how consumer products are not immune to the notion of commoditization, particularly as Christensen has described it (I think you might have the wrong idea about what commoditization really means in the context of Christensen’s very detailed definition/explanation/theory).  And Apple’s market is no exception. 

 

However, this is not to say that Apple won't be able to make nice profits as a "high end" provider of an integrated solution.  It’s just that one should not be in denial and say that: well, Apple is like Porsche, and therefore they will continue to get almost all of the profit share available from mobile device hardware sales, generally.  First, I highly doubt that will continue to be the case.  Second, the profit pool from hardware sales could easily stay static (or shrink) based on the strategy that other hardware vendors decided to use, which is to use mobile devices to push their software and services.

 

Android is a commodity. Anyone can use it, it gives no advantage to anyone over anyone else to use it. In fact, Android vendors are making big efforts to differentiate themselves by changing the UI and software (Tizen, proprietary apps that duplicate existing android apps, which is why Samsung has 2 settings apps and 2 photos apps, etc), it's just too bad these vendors mostly suck at software and that there's only so much you can do on top of a platform you don't control. But iOS is differentiated; only Apple can use it and shape it, and they also happen to shape 100% of the hardware it runs on, so they can integrate it much better, and people clearly like the result better for a variety of reasons.

 

As the difference between iPhones and Android (and other) devices becomes smaller and smaller

 

That must be why the Galaxy S5 got lukewarm reviews and Samsung just fired the guy in charge of its design. Because they're now on the level of quality of the iPhone.

 

Again, I would argue from a qualitative basis that the difference is definitely getting smaller and smaller.  But I don’t want to get into a product-focused discussion, as we’re definitely going to disagree on how much superior the iPhone or iPad is versus competing products.  IMO, the difference between OSX devices and Windows PCs is far greater than the difference between iOS and Android devices.

 

But that’s just my personal take.  Maybe I have bad taste?

[Liberty]

I'm not so sure about killing the other apps. There is a "strategy tax" involved with it: You can't become the world's leading streaming music service without being available cross platform. This would make Beats far less attractive to record labels and artists, especially compared to rivals like Spotify and Rdio.

 

John Gruber linked to this blog post making a case for keeping the apps separate.

http://jonmaples.com/2014/05/08/the-magic-numbers-how-apple-beats-the-demise-of-music-downloads/

 

The cost of that strategy tax must be weighted against any strategic gains. If you lose in some ancillary business but gain in your primary business, the tradeoff can be worth it (ie. anything that makes the iPhone more attractive has huge leverage).

 

Apple cares more about profits than eyeballs or marketshare. Record labels also care more about money than how many people are listening for free... I doubt Apple will ever have more trouble getting good deals with music labels than Spotify, thanks to their iTunes business, and now if they have the chairman of Interscope Records on their team...

 

Beats could very well make more money than Spotify and Rdio despite not being on all platforms in the same way that the Apple App Store makes more money while being on just one company's devices, or how iTunes is on one mobile device OS (though many computer OSes, which is becoming less relevant). Apple users just spend way more, and Beats could have many more paying subscriptions than Spotify despite having a smaller number of users. And since both Spotify and Rdio are available on iOS, nothing's lost for Apple users, though an Android user who feels Beats is the best music streaming service might be tempted...

[Liberty]

What this particular acquisition does is underscore the notion that both phone hardware and the OS itself are commoditizing.  $3 billion may be chump change to Apple, but it's difficult to argue that this is not a lot of money to pay for Beats.

 

That entirely depends on their sales, margins, growth rate, and how what they have can be used by Apple, no? I don't think you can say if it's expensive or cheap yet without having more information about what it is and what is done with it.

 

Have you used the Nexus 5 or a Nexus 7?  They're both pretty awesome.

 

Yes, and awesome isn't the word I would use.

 

I think it’s a bit of a denial to say that people who don’t “get Apple” have the wrong mental models and those mental models simply don’t apply to consumer products.  I’ve talked before about how consumer products are not immune to the notion of commoditization, particularly as Christensen has described it (I think you might have the wrong idea about what commoditization really means in the context of Christensen’s very detailed definition/explanation/theory).  And Apple’s market is no exception. 

 

I'm not saying it can't happen to consumer products. I'm saying the factors are different, and I don't see Apple being much vulnerable right now. That might change in the future, though, but lately I've more noticed that the competition has been losing steam rather than gain ground when it comes to the field where Apple plays.

 

But that’s just my personal take.  Maybe I have bad taste?

 

Maybe. You seemed to really like that Blackberry phone at the Fairfax AGM 2 years ago ;)

 

Let's just agree to disagree and see what happens.

[txlaw]

What this particular acquisition does is underscore the notion that both phone hardware and the OS itself are commoditizing.  $3 billion may be chump change to Apple, but it's difficult to argue that this is not a lot of money to pay for Beats.

 

That entirely depends on their sales, margins, growth rate, and how what they have can be used by Apple, no? I don't think you can say if it's expensive or cheap yet without having more information about what it is and what is done with it.

 

Headphones are a commodity biz.  Yeah, these gaudy, supposedly high end headphones have had their time to shine.  I think it's unlikely that Apple will benefit from being able to scale up the Beats hardware biz, though.  Like I said before, if Apple really wanted a great audio hardware biz, they could have done it themselves without the Beats brand.

 

Have you used the Nexus 5 or a Nexus 7?  They're both pretty awesome.

 

Yes, and awesome isn't the word I would use.

 

Your opinion, of course.  Definitely awesome given the price.

 

But that’s just my personal take.  Maybe I have bad taste?

 

Maybe. You seemed to really like that Blackberry phone at the Fairfax AGM 2 years ago ;)

 

Selective/twisted memories, I think. 

 

When I was playing with the Z10, I noted how much lag there was and that the "flow" was pretty janky compared to iOS and Android devices.  I remember swiping up to the right and being like -- well, that doesn't work very well on this hardware.  Biaggio can corroborate, I think, though he may not remember.  I did, however, say that I liked the peeking concept of "flow," some of the gestures on BB10, and the multi-tasking UI.  Interestingly enough iOS 7 copied a lot of these concepts (from BB, Android, Winphone, etc.).  So maybe I don't have such bad taste after all. ;)

 

I also remember telling you was that while it was actually pretty impressive what BBRY had built on top of QNX -- not that I was in love with BB10 or the Z10 device -- I was viewing BBRY in terms of its break-up value. 

 

I think I also showed you my new iPhone 5, though that may have been VAL that I'm thinking of.

 

Let's just agree to disagree and see what happens.

 

I agree to disagree. 

[Liberty]

Headphones are a commodity biz.

 

Just like computers, digital music players, phones, and tablets, right? :)

 

And shoes of course. I think rkbabang said it well.

 

if Apple really wanted a great audio hardware biz, they could have done it themselves without the Beats brand.

 

If opportunity cost didn't exist, sure. But I'd rather they keep their best people working on other things (Apple has a relatively small team of engineers and designers, despite their huge market cap). By using cash found under a sofa cushion, they get a dominant position in the high-end high-margin headphone market and get rid of a dominant competitor in that market and get potentially useful assets and people in the streaming music biz. Not too bad, especially if this deal accelerate the growth of this business by giving it exposure, integration into iOS, and some of the halo effect from being under the Apple brand umbrella.

 

Success isn't that Beats transforms Apple is some significant way -- it doesn't need that and I don't think they want that. Success is just to create more than 3.2bn in value and making the user experience better for Apple customers. I think that's definitely plausible, especially at Apple-scale.

 

Selective/twisted memories, I think.

 

It's possible I'm misremembering it, and it's also possible that from my point of view you seemed to like it more than you actually did. I can't read minds, I just came away with the impression that you were overall pretty positive on it, despite also having some complaints. Either way, I was just teasing you because you opened the door wide, not trying to do a big 'gotcha' or anything. I hope it didn't come across that way :)

[txlaw]

It's possible I'm misremembering it, and it's also possible that from my point of view you seemed to like it more than you actually did. I can't read minds, I just came away with the impression that you were overall pretty positive on it, despite also having some complaints. Either way, I was just teasing you because you opened the door wide, not trying to do a big 'gotcha' or anything. I hope it didn't come across that way :)

 

Sorry, last time I was active on this board about Apple, valueInv was being . . . well, we all know how he interacted with people. 

 

That informs my reaction to any discussion about AAPL where RIM/BBRY is also mentioned.  So take that for what its worth.

[Liberty]

No problem. For the record, I really respect your opinion and thought process tx. I happen to think you're wrong, but you also think I'm wrong, and I hope you respect my thinking despite that. There would be nothing to discuss and no mispricings if everyone agreed. So it goes, as Vonnegut would say...

[txlaw]

I happen to think you're wrong, but you also think I'm wrong, and I hope you respect my thinking despite that.

 

Absolutely.

[Liberty]

http://www.dailydot.com/technology/apple-beats-jimmy-iovine-dr-dre/

 

This is interesting. There's the whole Apple TV angle that I hadn't thought of (didn't know Iovine was so connected on the TV/film side too).

 

And this is interesting too:

 

Unlike other music streaming services like Spotify or Rdio, which are disliked by large swaths of artists, Beats Music was practically built by the music industry. Labels like Universal Music Group have stakes in the company. Playlists have been curated by music executives, and artists have premiered songs on the service. Nine Inch Nails frontman Trent Reznor is the Chief Creative Officer. This isn’t a company that has problems getting along with the music industry, as Apple has at times.

 

Also saw this on Twitter:

 

Fun fact: Beats' industrial design lead is Robert Brunner, Jony Ive's predecessor as Director of Industrial Design at Apple.

 

From the WSJ, sales "more than 1 billion in U.S. alone":

 

The premium headphone segment was limited to wealthy audiophiles before Beats came on the scene in 2008 with its iconic $400 headphones branded by co-founder Dr. Dre. Against conventional wisdom, the category exploded, making up sales of more than $1 billion last year in the U.S. alone, with Beats's market share at more than 60%, according to NPD data

 

Another source pins sales at 1.2bn.

 

Walt Mossberg interview with Iovine from 2013:

 

 

Some stats on the growth of streaming:

 

http://www.bloomberg.com/news/2014-05-09/why-apple-may-need-beats-music-streaming-more-than-trendy-headphones.html

 

"Downloads still dwarf streaming — 67 percent versus 27 percent worldwide last year — but tastes are changing. Revenue from streaming has more than tripled since 2010, surpassing $1 billion for the first time last year, IFPI data show."

 

"RBC Capital Markets analyst Amit Daryanani pointed to estimates that subscription-based music revenues rose 50% to US$1.1-billion in 2013, while downloads fell 2% to US$3.9-billion – the first decline in history"

[Kiltacular]

Like said in the other thread, you see people walking around all the time with Beats plugged into an apple product.  This is was a hole in Apple's product line and a company that had already out-Appled Apple with the marketing, cosmetic design, and coolness factor.  Apple couldn't put out a competing product, because they would have to compete against Beats and would probably lose.  Besides the margins on these things have to be incredible.  My daughter has a set of Beats Studio and I've compared them to my Sony headphones which cost me about $75.  They sound about as good as each other, the Beats have more lowend, which you can correct for at the source.  The point is that if Sony can make money charging $75, what are the margins on Beats at over $300?  I'm not sure what they spend on marketing, but you can manufacture these things for a small fraction of what they are selling them for. $3B doesn't sound like too much to pay if Beats has between $500M and $1B in sales with 40-90+% margins.  Then there is the streaming service, Apple is getting the profitable headphones business and taking out a small competitor.  Sounds like a good deal to me.

 

I agree with this analysis.

[Viking]

Interesting acquisition should it happen. In the Walt Mossberg interview Iovine says the tech companies do not get content; just like content companies do not get tech. Perhaps Apple recognizes they lack an important ingredient and this uncharacteristic acquisition is intended to address that issue.

 

My immediate reaction to the rumor was concern; was this deal signalling that Apple will be spending (wasting) money on much larger acquisitions like we have seen from Microsoft, Google and most recently Facebook. As I get to know Beats better I am getting more comfortable that they will be bringing a much needed skill set to Apple.

[GregS]

Like said in the other thread, you see people walking around all the time with Beats plugged into an apple product.  This is was a hole in Apple's product line and a company that had already out-Appled Apple with the marketing, cosmetic design, and coolness factor.  Apple couldn't put out a competing product, because they would have to compete against Beats and would probably lose.  Besides the margins on these things have to be incredible.  My daughter has a set of Beats Studio and I've compared them to my Sony headphones which cost me about $75.  They sound about as good as each other, the Beats have more lowend, which you can correct for at the source.  The point is that if Sony can make money charging $75, what are the margins on Beats at over $300?  I'm not sure what they spend on marketing, but you can manufacture these things for a small fraction of what they are selling them for. $3B doesn't sound like too much to pay if Beats has between $500M and $1B in sales with 40-90+% margins.  Then there is the streaming service, Apple is getting the profitable headphones business and taking out a small competitor.  Sounds like a good deal to me.

 

I agree with this analysis.

 

I agree too.  Hard to say what Beats' financials look like, but you make a good argument that the price is reasonable for the headphones biz even if on the top of the range. Apple gets a product with high margins that integrates well with their products and brand. Apple has enough brand cache that they don't hurt Beats' image. However, the idea that they could have created this themselves is crazy. This brand was built on music industry credibility, not tech.  This is what Apple gets.

 

I watched the Iovine interview with Mossberg and found it fascinating.  I think there's a lot of potential for Apple to reinvent iTunes. Their streaming service doesn't seem to be getting much traction and I think they've realized what Iovine said, which is that tech doesn't get content.  I think Apple is envisioning building something new with music industry expertise and relationships. It's hard to envision exactly what that will look like which is always the tough part with Apple. When they get it right, no one sees it coming.

 

One of the other things I find interesting is that many of the same people dumping on Apple for buying Beats criticized them for not buying Nest. So Apple is wrong to buy one of the strongest brands in the music industry but should have bought the soon-to-be-commoditized wifi thermostats?  I don't get it.

[VAL9000]

Here's one for you all - is Beats any different than a fashion brand?

 

[Guest wellmont]

this kind of reminds me of ebay/skype/msft. apparently the value of beats just went through the roof in the last year...or Big Tech Companies are just easy marks for fast talking entrepreneurs.

 

Popular headphone maker Beats is buying back HTC's 25 percent stake in the company. HTC originally bought a $300 million, 50.1 percent stake in Beats back in 2011, and the headphone maker then paid $150 million to buy back half of that investment last year. Today's announcement means the close partnership between the two companies is coming to an end, with Beats buying back the final $265 million in shares. In a statement, HTC says Beats will still be an important partner, but it refused to say exactly how important the move is. The company also declined to state the reasoning behind the split and what financial impact the decision has.

[Liberty]

Here's one for you all - is Beats any different than a fashion brand?

 

Like Nike you mean?

[GregS]

Here's one for you all - is Beats any different than a fashion brand?

 

Nope. It's a fashion brand.

 

A least for headphones. Music streaming is more of a wild card. Lots of opportunity to create something new, and I'm not sure how it will play out.

[Liberty]

this kind of reminds me of ebay/skype/msft. apparently the value of beats just went through the roof in the last year...or Big Tech Companies are just easy marks for fast talking entrepreneurs.

 

It doesn't remind me of that at all.

 

Skype wasn't making much money iirc and has zero synergies with ebay and few with microsoft (pure add on, not helping microsoft leverage this small company into making a much bigger product more profitable). It also wasn't doing great in mobile, so not very forward-looking. This was pure empire building, this was Coca Cola buying shrimp farms.

 

Beats is probably very profitable already. The company appears to be growing at 50-75% a year lately, so the value changes quickly. And it's probably worth a lot more inside Apple than as a standalone (which is how others were valuing it) because Apple can use it to improve all kinds of much bigger businesses; iTunes, iPhone ecosystem, Apple TV maybe, on top of just the future growth in headphones/speakers. If Sony had bought Beats, 10 years from now they most likely would have gotten only a fraction of the value that Apple could get from it because they don't have these very big, very profitable businesses that can benefit from Beats' assets.

 

That's like valuing Doubleclick as a standalone company and inside Google. Of course Google will be ready to pay a lot more for the whole thing than someone else will pay for a piece of it to keep it operating as a standalone, and conversely, the Doubleclick/Beats people know what they're worth to Google/Apple so that gives them negotiating power. Doesn't mean that the valuation is jumping for no reason and it's a mistake for Google to pay more for it than others if they really can use it to make more money than others because of the characteristics of their business. (I'm not saying Beats is like doubleclick for Google -- I'm just illustrating the principle of certain things being worth different amounts to different people. A sword is more useful to a ninja than to my grandma.)

 

In any case, Beats is a tiny acquisition for Apple, and unlike skype for eBay, it appears to make sense.  It doesn't mean it'll succeed, but it certainly has more potential than many other acquisitions.

[Guest wellmont]

it seems to have been worth about $1b last year and over $3b this year. Perhaps $300 headphones have been flying off the shelves?